The Affordable Care Act Subsidizes People to Quit their Jobs

June 18, 2013

Employees and employers often take steps to avoid layoffs, like working hard to encourage customers and clients to continue buying the goods and services provided by the business. Sometimes layoffs are not avoided by such efforts, which is why many employers also take steps to ease the burden of a layoff on employees and their families and to minimize disputes between them and the employer, says Casey B. Mulligan, an economics professor at the University of Chicago.

Many businesses voluntarily offer cash severance pay, which is intended to replace the usual paycheck for several weeks or months after the layoff, depending on the length of time that the employee had been with the company. During the time of unemployment, the former employee can many times collect both the severance pay and state unemployment insurance benefits.

During 2009 and 2010, the American Recovery and Reinvestment Act had the federal government pay some costs of layoffs, especially with its premium assistance program, which paid 65 percent of the premiums that a laid-off employee would pay to stay on the former employer's health plan.

People who could join a spouse's employer health plan and people without health insurance on their previous job were ineligible for the program.

Economists (and many employers) understand this premium assistance to be a subsidy to layoffs, making them cheaper and less of a burden. The law's premium assistance program ended in 2010, but significant amounts of premium assistance are coming next year as a part of the Affordable Care Act.

For families with income between 100 and 250 percent of the poverty line, the Affordable Care Act is even more generous than the Recovery Act because it helps them pay for both health insurance premiums and out-of-pocket costs like copayments and deductibles.

Also, health insurance is more expensive now than it was in 2009, which makes a percentage subsidy that much more valuable.

The Congressional Budget Office (CBO) has concluded that 800,000 people will take early retirements or quit as a consequence of the Affordable Care Act, not from its premium assistance, but based on the assumption that the unsubsidized non-group health insurance market will operate better. The CBO still needs to estimate how many people will be laid off as a consequence of the new subsidy to layoffs.

Be prepared for some unpleasant surprises over the next year or two, both as to the amount that the labor market is depressed and the unanticipated federal spending that will be needed to provide the benefits promised by the Affordable Care Act.